Shahid Sadruddin Nanavati
Response #4
Discussion Questions: Does there seem to be an Asian style of transition versus European style? Or is there some more appropriate way to categorize transitions? What is accounting for the differences? Taking the middle question first, of how to categorize transitions?:
The experiences of the Central and the Eastern European countries show that the costs of
transition from a planned to a market economy can be substantial. Most countries undergoing
such a transition suffered a sharp drop in output and employment and increased social and
political instability in the early phase of their transition (Siebert, 1991: 14-16). Some countries
like the former Soviet Union and Czechoslovakia even disintegrated politically under the
reform pressures. In contrast, the Chinese transition appears to be relatively smooth. With the
exception of the Tiananmen Square tragedy in 1989 China has so far not incurred any serious
political or social upheaval. Economically it not only experienced no drop in output and
employment during the transition but actually saw an increase in output at an annual average
rate of over 9 per cent over the last 15 years. Thus the Chinese reform model is very often
considered superior to other transition models and extolled as the model for other socialist
countries. (Chai 1)
Brezis and Schnytzer say that: there has been a marked difference in the transition dynamics
which have taken place over the past decade between Eastern Europe on one hand, and China
and Vietnam on the other. The latter countries have introduced successful market-oriented
privatizing reforms in the presence of communist dictatorships which show no signs of
weakening. In Eastern Europe, however, the collapse of communism went hand in hand with
economic reforms.
As per Woo Thye and Richard Philips, China began its privatization policy by introducing a
market economy, that is, by creating a non-state sector consisting of non-state enterprises,
where privatization refers merely to the introduction of some private enterprise into the
economy. For example, enacting a law which allows an artisan to become self employed is a
form of privatization. This type of privatization is considered to be rather primitive: This
meaning of privatization was relevant to developments in Eastern Europe less than three to five
years ago. Now ... for the most part Eastern European economies have moved far beyond these
initial stages. Thus, in the context of Eastern Europe, privatization means the transfer of stateowned enterprises to private ownership.... For example, in Czechoslovakia, Poland and
Hungary, the term privatization is generally used to refer to a specific program for the
wholesale divestment of state enterprises. However, in other states, which have not progressed
as far towards a Western style economy (for example Romania and Albania), privatization may
merely refer to the efforts of individual state-owned enterprises to introduce an element of
private ownership or to create a joint venture with private firms.
Shahid Sadruddin Nanavati
Response #4
Whether privatization is to involve merely the introduction of some elements of a market
economy or the actual privatization of state enterprises, privatization, in the environment of the
transitional economies, is not a simple transfer of ownership from state to private individuals.
It is rather a process by which the very institution of property is introduced to economy. These
economies require not only the restructuring of the economy but also the creation of private
property and the institutions of a market economy, while ensuring a maximization of economic
growth and a minimization of social, economic, and political disorder.
China, by contrast, has pursued the exact opposite strategy. Chinese reformers deferred statesector privatization and focused on establishing the fundamentals of a market-oriented
economy - in other words, a working market--in the newly created non-state sector (as per Jun
Qian – seminar notes). However, in the Chinese context, a market-oriented economy that
functions on commercial rather than politicized terms has been established, unfortunately, only
in the non-state sector - hence the rapid growth and increased productivity of non-state
enterprises. The Chinese state sector, on the other hand, continues to languish despite statesector privatization because of the absence of key institutional mechanisms necessary to make
privatization work.
Political and ideological considerations were among the factors that prompted Russia and
many Eastern European countries to engage in speedy and mass privatization of state-owned
enterprises and China to favour insulation of the state sector from private economic
encroachments and preservation of social ownership.
ECONOMIST, Sept. 18, 1999, at 81 says that China took a politically induced path that
allowed it to avoid many of the economic problems associated with Russian privatization. As
the World Bank's chief economist has noted recently in his controversial critique of the IMF's
role in Russian privatization "those who put privatization above all else were clearly wrong ....
[They] thought that you had to pursue privatization, and infrastructural change would follow.
They thought that the new owners of private property would demand that this happen. But
instead t hey took their money out."
References:
• Richard M. Phillips & Marian G. Dent, Privatizing Eastern Europe: A Challenge for the
Nineties, Handbook 1999.
• ECONOMIST, Sept. 18, 1999, page 81.
• Jeffrey Sachs & Wing Thye Woo, Understanding the Reform Experiences of China,
Eastern Europe and Russia, in from reform to growth: China and other countries in
transition in Asia and central and eastern Europe 31-33 (Chung H. Lee & Helmut Reisen
eds., 1994).
• Roman Frydman & Andrzej Rapaczynski, privatization in Eastern Europe: is the state
withering away 10(1994).
• C. H. Chai; China: Transition to a Market Economy, Oxford University Press, 1998
• Stiglitz J. E., "'Incentive and Risk Sharing in Sharecropping'", Review of Economic Studies,
April: 219-56.
Plus the suggested readings